Raining Liquidity

13/06/2017 09:54:31
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It looks both the rain gods at heaven and the money guards at Reserve Bank are fully in favour of capital markets. While the timely and abundant rainfall from the south-west monsoons already made the bulls dancing, the liquidity that RBI has injected in to the system will put the markets on cloud nine.

The rainfall this year during June 1-7 is up 18% compared to a year ago period. This year as per the current estimates farmers are preparing to cultivate kharif crops in 8.1 million hectares as against 7.2 million hectares. It is an increase of 12.5%. This increased acreage and the expected well distributed timely rains will result in higher output of rice, cotton, cereals, oil seeds, sugarcane and other food crops which in turn raise the rural incomes of all sections. These increased incomes lead to higher consumption. Particularly, the sales will increase significantly in the sectors like fast moving consumer goods (FMCG), white goods and two-wheelers.

Though RBI did not tinker with existing policy interest rates, its two important decisions will give a push to the economy. And it will bring liquidity surge in the capital markets. Now the banks can lend additional loans of Rs 1.22 lakh crore to housing as RBI has reduced the risk weightage for the sector from 50 basis points to 35 basis points (100 basis points = 1 percentage point). RBI also decided to reduce the standard provisioning for house loans. It helps banks to cut down their cost of funds. While the banks are offering 75% of the asset value as loan, RBI raised this Loan to Value limit to 80%, thus, facilitating more lending to housing sector. Already the housing sector is enjoying interest subsidies under affordable housing scheme. In this backdrop, the decisions of RBI might cause a multiplier effect on housing sector. The market size of this sector will probably reach Rs 17 lakh crore by 2024 from Rs 7 lakh crore in 2017. This impacts the cement and steel sectors positively and they will get a rerating. Cement shares are already rerated and the steel shares are awaiting their turn.

RBI fixed the SLR (statutory liquidity ratio) as 20%, by trimming the current rate by 50 basis points. This cut will enhance the available funds with banks for lending. Funds cost will further come down improving their profitability. On the other hand, the forex reserves reached the life time high of $ 381 billion. With increased liquidity caused by all the said factors, the capital markets move rapidly in northward direction

 The steel sector produced 16.39 million tonnes of crude steel in the first two months of 2017-18, registering 4.5% growth. The finished steel too witnessed an increase of 6.7% production. The imports decreased by 11.4% and came down to 1.062 million tonnes, while the exports in contrast increased by 102% to reach 1.382 million tonnes. India is thus emerged as net exporter. To see that China not participating in steel tenders, Government of India sharpened its policies. The new steel policy announced on May 3, 2017 fixed a target of 300 million tonnes by 2030 and allocated Rs 10 lakh crore to achieve it.

DHFL is a potential candidate in the housing finance sector to register high growth. To emerge more and more stronger, it is going to merge its subsidiary Aadhar Housing Financing with it. In the steel sector, Jindal Steel and Power Ltd and SAIL ltd will benefit from a sector wide rerating.

Natural rubber prices declined by 20%. Even the crude prices are staying below $ 50 mark. Since these two add-up 70% of tyres’production cost, JK Tyres will report marvellous profits. Its new plant at Chennai will start commercial production soon. Among other stocks, L&T and Reliance Defence are competing to grab a defence order worth Rs 25,000 crore that involves building four Defence ships. Both are bidding for it on June 22, 2017.  Reliance Defence has an edge over competitors. Debt-restructure and sale of non-core assets helped Mawana Sugars to earn extraordinary profits. while it reported a negligible net profit of Rs 80 lakh in the 15 months period ended March 31, 2016, the net profit zoomed to Rs 453 crore in the 12 months period ended March 31, 2017. With this, the negative net worth of Rs 386 crore dramatically turned as positive net worth of Rs 66 crore. Similarly, in Simbhaoli Sugars case also the once considered interest costs may be written off with the implementation of debt restructuring scheme. It may take some time before the financial institutions take a call.

It is Raining liquidity It is Nearing Upsurge

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